Stock Trading: Why We Avoid Buying Stocks Trading Below the 200-Day

With shares of ^RIMM^ plunging by well over 6% on Monday, it may be hard to find a better reminder of why short term traders are best served by avoiding stocks trading below their 200-day moving averages.

As Larry Connors and Cesar Alvarez outlined in their book, Short Term Trading Strategies That Work (click here to find out how to get your copy of the book for free), stocks trading below their 200-day moving average have tended to significantly underperform stocks trading above their 200-day moving average.

Many people like to buy stocks when they’ve been beaten down over a long period of time. You’ll see people “bottom-fishing” stocks as they are plunging lower under their 200-day moving average … It’s better to be buying stocks in a longer term uptrend than in a longer term downtrend …

Research in Motion may be the most recent example. But there are a growing number of stocks that have follow-through to the downside below their 200-day moving averages. This includes popular stocks like ^GOOG^, which has been trading below its 200-day since mid-April, and ^AAPL^, which has just closed below its 200-day moving average for a third day in a row.

There are still plenty of stocks pulling back above the 200-day moving average. And, for now, those are the stocks that short term traders, at least on the long side, should be focused on.

Note: ^ADBE^, ^CCL^ and ^WAG^ are all among the companies scheduled to report quarterly earnings on Tuesday. All three stocks were up more than 1% in Monday’s trading, but of the three only Walgreen is trading above its 200-day.

Closing in oversold territory above the 200-day moving average for a sixth consecutive session, shares of ^PCLN^ closed at their lowest level since late March. The stock had been trending lower since the beginning of May.

Credit card companies were among those stocks to move higher on the first trading day of the week. This includes gains of more than 1% in stocks like ^MA^ and ^COF^. Up three days in a row, but closing short of overbought territory above the 200-day were shares of ^AXP^.

Traders are selling short-term bounces in the financials, even without many of these stocks climbing into overbought territory. Down well over 1% after two-day rallies below the 200-day were financials like ^WFC^ and ^GS^.

Buyers have moved back into the market for shares of ^MON^. The stock closed higher after pulling back for three days in a row above the 200-day moving average. Two of Monsanto’s last three closes were in oversold territory.

Don’t be a stock picker! With 16 different quantified strategies for trading stocks and exchange-traded funds, Short Term Trading Strategies That Work is an ideal, practical guide to the world of quantitative trading. To learn more, click here.

David Penn is Editor in Chief of TradingMarkets.com

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